The Heliyon journal (Volume 10, Issue 12, June 30, 2024) published an article titled Comparative analysis: CapEx in diamond mining versus diamond growing, based on open data sources and experimental results. In July 2024, one of the authors of the publication, Professor Vladislav Zhdanov of the Higher School of Economics, gave an interview to Rough&Polished and explained the principal provisions of this unordinary work in easy-to-understand terms.
The essence of the matter is as follows. The authors of the article proposed a certain coefficient, which is the ratio of CapEx to the projected annual rough diamond output in carats. This coefficient was calculated for the production of synthetic diamonds using HPHT and MP CVD methods and for the natural diamond mining. The final results are given below:
The on-time CapEx per annualized carat for analyzed methods
|
Origin of diamonds |
CapEx total coefficient, $/annulized carat |
Notes |
|
HPHT |
500 - 833 |
750- and 850-mm China-made presses, about 1,200 ct of (near-) colorless middle-sized diamonds per year |
|
MP CVD |
549 - 1648 |
2.45-GHz, (near-) colorless, single crystal diamonds, reactor capacity is about 364 ct per year |
|
Gahcho Kué mining project |
217 |
De Beers Group, mix size of diamonds |
Based on the above data, the authors conclude that investing in natural diamond mining is more attractive than investing in synthetic diamond production. According to Zhdanov, “Assuming that a financially stable group makes its decision to diversify its business into diamond production without being limited by the amount of funding, from the CapEx point of view, I would recommend diamond mining - the Old School does not ’give up’.”
As true advocates of the ‘Old School’, we will touch upon only one aspect of the article under consideration dedicated to the natural diamond mining. Professor Zhdanov et al. report as follows: “This part of the study was made possible by De Beers Group’s openness - the data of the new Canada-based mining project Gahcho Kué is open to everyone – the on-time investment is around $500 million for 51 percent of stake in diamond entity with 4.5 million carat per year …. According to professional media, … the Gahcho Kué projects was initially valued at $858.5 million (including, citation “a $76-million contingency”), therefore we cannot say that De Beers bought the [majority] control with a discount – price paid was relevant.” Zhdanov expressed similar considerations in his interview with Rough&Polished, “As an example of diamond mining, a relatively new deposit Gahcho Kué in North America was considered. With an announced stated investment level of $500 mn for a 51-percent stake and a planned production of 4.5 mn carats per year, simple calculations show that it is necessary to invest $217 per carat of annual diamond production.”
According to Zhdanov’s logic, it should be recognized that De Beers acquired a 51-percent stake in Gahcho Kué for $500 mn, therefore, a 100-percent value of the project at the time of acquisition was $980 mn. Dividing this figure by 4.5 mn carats gives the expected $217 per carat in annual production terms.
But where did this figure of $500 mn come from? The article does not indicate the source. And why the figure is so vague - “around $500 million”, is the specific data on the CapEx of the Gahcho Kué project where the commercial diamond mining began 7 years ago still unavailable in 2024? The answer is quite simple - De Beers’ investment of $500 mn for a 51-percent stake, perhaps, is nothing more than the fantasies of Professor Zhdanov and his colleagues that are not supported by documents. Indeed, De Beers became the owner of a 51-percent stake in Gahcho Kué in 2002 when it set up a joint venture with Mountain Province (44.1 percent) and Camphor Ventures (4.9 percent). At that time, the CapEx forecast for the Gahcho Kué project was only $600 mn (data from the MOUNTAIN PROVINCE DIAMONDS INC. ANNUAL REPORT 2004), so 51 percent makes $306 mn, not $500 mn. However, the procedure of obtaining a majority stake by De Beers in this project had nothing to do with one-time investments, especially in such amount.
Large-scale capital expenditures on the Gahcho Kué project began only in 2013, and in April 2014, an adjusted estimate was published. It was 858.5 mn dollars, including contingencies of 75.6 mn dollars, however, the sum was not in US dollars, but in CANADIAN dollars! However, in the article by Zhdanov et al., these figures, unreasonably called the “initial values”, magically turned into US dollars. And in 2016, some “professional media” published a careless and inaccurate report that Anglo American was commissioning the Gahcho Kué project worth about 1 billion dollars. It is clear that 51 percent of one billion is “around 500 mn dollars.” But in this case, we are again talking about CANADIAN dollars! This currency is designated as C$, Cdn$ or CAD, but not as $, as it was designated in the article by Zhdanov et al. (In 2016, $1 = 1.3251 CAD on average). As a result, the readers of Heliyon were given a “comparative analysis” with the indicators for HPHT and CVD calculated in US dollars, and the indicator for natural diamonds was actually in Canadian dollars, which the authors indicated as US dollars. Frankly speaking, this is probably the first time we have encountered such a flagrant manipulation in a scientific publication. I believe, should such a manipulation had happened in the course project carried out by a third-year student at the Higher School of Economics, he would have been given an “F” by Professor Zhdanov.
Indeed, Zhdanov et al. rightly praised De Beers for transparency, all the necessary data is available in the reports on the Gahcho Kué project, but they have nothing to do with the article in question. I would like to quote the Mountain Province Diamonds report GAHCHO KUÉ MINE NI 43-101 TECHNICAL REPORT NWT, CANADA dated March 16, 2018, section 21.1. Mine Development Capital Costs: “The initial capital used to construct the Gahcho Kué Diamond Mine was spent between late 2013 and mid-2016. Capital projects incorporated into this phase of the project included:
- Pre-Development (Exploration, Drilling, Engineering);
- Airstrip;
- Process plant;
- Truck shop;
- Fuel farm;
- Explosive plant;
- Powerhouse;
- Camp and supporting infrastructure; and
- Bulk earthworks for infrastructure, airstrip and several water management structures critical to initial lake dewatering and pre-stripping of 5034. The initial capital phase of the project was completed in 2016 on budget and ahead of schedule.
Total capital cost of the project phase was reported as C$1,056M plus an additional C$259.5M in predevelopment costs.”
So, the initial investments in the project were made 11 years after De Beers acquired a 51-percent stake and they amounted to C$1,315.5 mn. But is CapEx in mining projects limited to upfront investment? I would like to continue quoting the report, “Sustaining Capital Costs Since production commenced in 2016, plans for ongoing capital expenditures identified to sustain operations or further develop aspects of the mine’s process and infrastructure have been developed.
Sustaining capital expenditures includes:
- Purchase of additional or replacement surface mining equipment;
- Replacement of light vehicles;
- Ongoing construction of water management structures and lake dewatering activities;
- Value added infrastructure development projects identified to improve the operations as a whole;
- Purchase of critical spare parts.
Life of mine capital projects at the Gahcho Kué Mine are referred to as Stay in Business (SIB) Capital and are forecasted on an annual basis with an emphasis placed on the upcoming budgeting year. Due to the seasonal nature of the ice road and optimum construction season, it is critical that these projects are scoped and budgeted in time to allow for procurement and mobilization to incorporate the winter road when required. Capital cost assumptions in this report reflect the current life of mine SIB model for the mine as a whole.”
According to other Mountain Province Diamonds reports, the SIB model for the Gahcho Kué mine is as follows in figures:
|
Year |
SIB, C$ mn |
|
2018 |
54.6 |
|
2019 |
31.5 |
|
2020 |
102.6 |
|
2021 |
92.6 |
|
2022 |
150.1 |
|
2023 |
165.8 |
|
2024 |
185.2 |
|
2025 |
178.8 |
|
2026 |
171.9 |
|
Total |
1133.1 |
According to the Gahcho Kué’s technical reports (https://www.mountainprovince.com/mineral-resource-reserves)
Thus, the initial investment plus SIB in 2018-2026 amount to C$2,448.6 mn and this is not the limit since the mine operation is planned until 2030, and after that, money will be required for the mining site closure and the reclamation of the area. And all this is CapEx, not operating expenses. It should also be noted that a retrospective analysis of the reports on the Gahcho Kué mine shows that the forecast data on the SIB capital, as a rule, increases from report to report, and the maximum values are indicated in the table above.
Synthetic diamond production has a fundamental difference from diamond mining exactly when it comes to CapEx. If you purchased equipment for the production of synthetic diamonds from a reliable manufacturer, contracted a qualified company to carry out the installation and commissioning of the equipment, received the appropriate guarantees and insurances, have legally sound contracts for leasing the premises, supplying the electricity, etc., indeed, your CapEx is one-time initial investments, and later on, you will have operating costs only, at least for the equipment warranty operating life. But in diamond mining, capital expenditures are required throughout the entire period of the development of a deposit, including its closure (which is an axiom), and the data is in all reports on the Gahcho Kué mine. Ignoring this circumstance and calculating the notorious coefficient, using only the initial investments in the numerator that, by the way, do not correspond to reality, make the “comparative analysis” under discussion simply meaningless.
In summary, the conclusion made in the publication in question that natural diamond mining is more attractive to investors than the synthetic diamond production is based on probable manipulation that lies in undervaluing the real CapEx of the Gahcho Kué project by at least 2.5 times. Due to this circumstance, as well as the very strange manipulation of using the Canadian dollar in calculations, which is passed off as the US dollar, the article becomes an element of the reference base in the escalating marketing battle between natural and synthetic diamond producers rather than a scientific publication.
Sergey Goryainov for Rough&Polished
